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Where to Park Your Cash

You have money, you need a place to put it for a while and the financial institutions are lining up at the door. You may be tempted to fall for whatever suitor makes a good first impression, but remember: This choice is all about you.

The best short-term savings account is the one that best matches your needs in the following areas:

Access: How often will you need to dip into the account, and what's your preferred method of access -- ATM, checkwriting, online, and the like?

Interest: How much will the institution pay you for babysitting your money, and does the amount you need to park in the account qualify for the best rates?

Service: Might you require bells and whistles, such as in-person customer service, or are you more of a DIY, low-maintenance customer?

Penalties: Should your plans change -- you need to get to your moola sooner than planned, for example -- how harsh of a punishment will you need to endure?

Now, let's review the major aspirants:

Checking accountsChecking accounts are meant for transactions, not savings. That's why many don't pay much, if any, interest. However, some banks do combine the conveniences of checking with the return of a money market account. Also, as "asset management" accounts at brokerages become more feature-rich -- offering unlimited check writing, ATM access, and money market rates -- more folks are shunning the banks in favor of brokers.

Pros

Your money is only a check or an ATM machine away.

A bank branch is usually not far, often in your grocery store, if you're so old-fashioned as to want to deal with a human being.

As with all bank deposits, checking accounts are insured by the Federal Deposit Insurance Corp.

Cons

Depending on the bank, you may not earn much, if anything, on the money in your account.

Many checking accounts require a minimum balance or charge fees, or both, which are a pox upon your pecuniary patience.

Savings accountsIn the old days, savings accounts -- or passbook accounts, as they're sometimes known -- were the most popular rest area for short-term savings. Fortunately, folks are getting smarter and parking their pelf in higher-yielding investments. The pittance you earn in most savings accounts isn't enough to even keep up with inflation.

Pros

The money in a savings account is insured by the FDIC.

Account minimums are often low.

Cons

The return on savings accounts is so low, some mattresses pay more in interest.

High-yield bank accountsNowadays, you can find high-yield savings and checking accounts. They're an ideal place to park money for your monthly bills. They offer flexibility (you can add or withdraw funds at any time) and liquidity (your dough isn't locked in for a specific time period). Some even boast interest rates on par with more restrictive investments like CDs. The best rates by far are offered by online-only banks that keep costs low by cutting back on frills.

Pros

Better rates than many standard bank accounts.

Same FDIC insurance applies to high-yield accounts.

Cons

Bare-bones banks with no ATM/debit access or check-writing privileges can be a big hassle if you need your cash fast.

Customers must coordinate their cash flow by transferring money back and forth from the online bank to a linked checking/savings or brokerage account. That means delays -- two to five days -- before everything's reconciled.

Watch out for limited-time teaser rates by researching the product's six-month interest rate history.

Money market deposit accountsMoney market deposit accounts are offered by banks, usually require a minimum balance, and permit a limited number of transactions per month (six transfers, three of which can be checks written on the account).

Pros

Money market deposit accounts are very liquid. Most allow for easy access through checks, transfers, and even ATMs.

Because they are offered by banks, money market accounts are insured by the FDIC.

Cons

Unfortunately, you may pay for the liquidity by receiving less in return than from certificates of deposit.

If your account falls below the minimum required balance, or you exceed the limited number of transactions, you might pay a penalty.

With a money market fund, you can have the money in your hot little hands very quickly. Often, you can write checks or use an ATM card.

The returns on money market funds are typically higher than the return on money market accounts.

Issuers go to great lengths to keep the NAV (the price of each share of the fund) at $1, so your principal is relatively safe.

Cons

Money market funds are not FDIC insured.

There is no guarantee that the NAV will remain at $1.

Certificates of deposit (CDs)CDs are debt instruments with a specific maturity, which can be anywhere from three months to 60 months (i.e., five years). Most CDs are issued by banks, but they can be bought through brokerages.

Pros

CDs are very safe because most are offered by banks, so they are FDIC insured.

Depending on how long it is to maturity, CDs may pay more than money markets.

Cons

Your money is off-limits until the CD matures. If you must, you can redeem the CD early, but you'll pay a penalty.

U.S. government bills or notes"Treasuries" are backed by the full faith and credit of the U.S. government. Treasury bills mature in less than a year; Treasury notes mature between two and 10 years.

If you shop around, you might get a better return from money markets, CDs, and corporate bonds.

If you need your money before the security matures, you may not get back all of your original investment.

I BondsNo, they have nothing to do with the Internet. I Bonds are inflation-indexed savings bonds issued by the U.S. government. The amount an I Bond pays is adjusted semiannually to keep up with inflation and protect the purchasing power of your money.

Pros

I Bonds are backed by the full faith and credit of the U.S. government.

The "I" in I Bond protects your investment against inflation risk.

They are sold in manageable denominations, ranging from $50 to $10,000.

They can be bought from most financial institutions, including TreasuryDirect.

The earnings are exempt from state and local taxes, and can be tax-free if used for post-secondary education expenses.

Taxes on earnings can be deferred for up to 30 years.

Cons

You must hold an I Bond for at least 12 months, and you will pay a penalty of three months' earnings if you redeem the bond before owning it for five years.

Municipal bondsMunicipal bonds (or "munis," as the big talkers refer to them) are issued by state and local governments in order to build schools, highways, and other projects for the public good. Municipal bonds are most attractive to high-income investors looking for tax-friendly income.

Pros

Munis are just a step down from U.S. securities in terms of safety.

Income is exempt from federal taxes, and might be exempt from state and local taxes if you live in the municipality that issued the bond (check on the tax implications beforehand).

Cons

Interest from munis is relatively low. Unless you're in a high tax bracket, you'll usually get a better return from other investments.

You may have to pay a commission to buy municipal bonds.

If you need your money before the bond matures, you may not get back all of your original investment.

Corporate bondsCorporate bonds represent debt issued by companies, from the blue chips to the "cow chips," if you know what we mean. The more creditworthy the company, the less it'll pay in interest. Moody's and Standard & Poor's rate companies as to their ability to meet their debt obligations. Only short-term bonds are appropriate for short-term savings.

Pros

Corporate bonds usually pay more than government securities, money markets, and CDs.

Cons

The company that issued the bond could suspend interest payments, or even go belly up.

You may have to pay a commission to buy bonds.

If you need your money before the bond matures, you may not get back all of your original investment.

Bond fundsBond funds are mutual funds that pool the money of investors to buy bonds of all stripes.

Pros

They are an efficient way to buy bonds in small increments and get the diversification that minimizes the risk that you picked a bond from a deadbeat company.

Cons

The NAV (i.e., the share price) of a bond mutual fund fluctuates, because of interest rate movements and the bonds bought and sold inside the fund. Therefore, you're not sure exactly how much of your original investment will be around when it's time to take your dough. Likewise, the yield on a mutual fund fluctuates.

You will pay an ongoing expense to own the fund, called the "expense ratio," and you may have to pay a commission, called a "load."

This story is adapted from a Robert Brokamp article. It has been updated.

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Comments from our Foolish Readers

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These are scary times! I agree that you should, to some extent, stay in the market. But the question is how do you effectively minimixe your losses? If the investors who are responsible for millions of dollars and have years and years of investing experience plus at top class education; how is a novice investor like me going to decide what to do and what not to do. I appreciate the recommendations for professional advice.. but sometimes... they are dead wrong. HELP!!!!!

Money market funds pay next to nothing, like savings accounts. Cashed in long-time-held I bonds when the rate went to 0.0. Bond yields in general are so low that when the Fed decides to mop up you-know-what, losses will be worse than the late 1970s-1982. Be very, very, careful.

What about gold? I will have 5000 coming in Jan, and another 5000 for the next 4 years. I want to save it all up for a kitchen renovation. I wondered about buyibng gold this Jan, then cashing it out to get the principle + gain next Jan, and re-investing now the whole lot + my next 5000....and so on until I have enough for my kitchen.

Gold is a pretty good hedge against inflation and also a good play considering the dollar is taking a fairly sound beating. However, If you had some cash now to put into the equity market for a 4th quarter play, that could lead to some nice valuations by the end of the 2009 as I think the market has a lot of momentum right now, but I am weary of 2010. There are some good picks out there with a bit of fundamental analysis. Having said that, Gold might be the safe haven and best play for 2010.

About CD rates... I think one sign that a bank is in bad trouble, is offering a top CD rate. I've noticed this after 3 years of perusing rates and waiting out a very shaky bank for 18 months while (high rate) CD matured and bank rating got downgraded every 3 months or so.... It's true that FDIC insures these, and that so far FDIC-negotiated takeovers have been relatively uneventful for depositors. But there's always a first time...

To save money,Treasury is dumping paper bonds that have provided proof of purchase for decades. That must be a way for them to cheat people and help pay off our huge debt when people lose track. Everyone knew a bond was a bond before, Now you'll get only an anonymous print- out. Lots of heirs will no doubt have no idea what they are.(..the more that are lost, the less debt?). I tried to get help from those folks and ,wow, it was awful. They don't even respond to mail. My I bonds are MIA. My congressman offered sympathy but no help.**###@@@@)) !!

If one has extra cash to be parked the best way is to put or invest the cash in insurance coverage which will give life & medical coverage as well give money back after a certain lock in period. Secondly money can be invested in stocks which can yield good returns if invested carefully. Also the money can be used to buy gold which over a period of time can yield good returns.